Payday Loans

I wrote this a while back. Still seems relevant in the light of the Archbishop of Canterbury having appointed a failed financial capitalist to push forward competing with Wonga on the basis of unpaid labour...

Payday loans are big news. July's announcement by the Archbishop of Canterbury that he wanted to 'put them out of business' by supporting a network of credit unions follows prolonged scrutiny from politicians and campaigning groups. Walthamstow MP Stella Creasy, in particular, has been prominent in opposing the high-interest, short-term, lenders she calls 'legal loan sharks', and has pressed for tighter regulation of the industry.

Socialists should care about payday loans. Not only do they have a severe and negative impact on some of the most financially vulnerable people in society; the growth of the industry also reveals a lot about contemporary British capitalism.

Supplied by firms such as Wonga and Money Shop, and most often taken out for very short periods ('until payday'), payday loans are unsecured and have extremely high interest rates. Some loans with Wonga have an APR of 4500%, and Which? calculate the average cost of payday loans as being £25 for every £100 borrowed per. month. Exploitative in themselves, these rates can trap people in debt and hardship if the loans are not paid off quickly – and 70% of those who use payday lenders have rolled their loan over at least once.

Payday loans are used to pay for the necessities of life. 78% of loans are used to pay for basics: food, household bills, or housing payments. Very often payday loans are used as overdraft substitutes by people denied credit by banks. People do not put themselves in this situation lightly, in spite of the patronising talk of 'financial illiteracy' from some charities. The context within which this dependence on expensive credit has come about is one of low wages, reduced benefits, and expensive housing.

Everybody needs to feed, clothe, and house themselves and their dependants. If wages, supplemented by in-work benefits, don't provide the means to do this, people will rely on credit. Last month the TUC reported that UK real wages had been falling for 40 months. Combined with high underemployment – around 10% of UK workers according to the UK Labour Force Survey – and the financial insecurity created by short-term and zero-hours contracts, the result is a situation ripe for exploitation by lenders. Add to this the Coalition's sustained attack on in-work benefits, and the sky high cost of housing, especially in London, and it is fair to describe the UK as suffering from a crisis of working-class income.

To be addressed properly this crisis needs tackling at the roots. Credit unions, praiseworthy in themselves, are not a panacea, and the suggestion that they are in a position to force payday lenders out of business is naïve in the extreme. Still less is an emphasis on 'financial literacy' the way forward. There is, of course, nothing wrong with helping people manage their money, and some people from all backgrounds have problems with personal finances. However, the suggestion that there is a systematic problem with lower income peoples' money management is simply a moralising attempt to blame people for their own poverty.

Regulation of payday lenders should not be ruled out by the Left. We do, though, need to be careful. Horrific though this is, people depend here-and-now on these loans to feed themselves. We have to be very careful that we don't give our backing to piecemeal reforms which deny them even this opportunity.

The real solution is to address the crisis of income which allows payday lenders to flourish. We need real action on wages; we should support the Living Wage for all workers, and give our backing to struggles for higher wages in our workplaces and localities. We should push for the reversal of the Government's attack on the welfare state, and for the extension of more generous benefits, guaranteeing everyone a decent level of income. We should act on housing: arguing for rent controls, the building of council houses, and measures to stop the escalation of house prices. And, above all, we should call into question the capitalist system which allows the parasites of Wonga to grow fat on the desperation of others.